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Impact Investing

A fascinating article has just emerged tying increases in violence to airborn lead in gasoline before that was outlawed. It's an extremely thorough study that correlates 90% of rising violence to lead exposure, with about a 20 year delay from when the lead went into the air.

So is this all just an interesting
history lesson? After all, leaded gasoline has been banned since 1996,
so even if it had a major impact on violent crime during the 20th
century, there's nothing more to be done on that front. Right?

Wrong.
As it turns out, tetraethyl lead is like a zombie that refuses to die.
Our cars may be lead-free today, but they spent more than 50 years
spewing lead from their tailpipes, and all that lead had to go
somewhere. And it did: It settled permanently into the soil that we walk
on, grow our food in, and let our kids play around.

Lead is extremely damaging to cognitive function (IQ) and the ability to control one's impulses. The article explains all this in detail. But the conclusion is pretty startling - it's not that hard to fix as things go, and it would massively solve all kinds of issues, from violent crime to educational woes with classroom chaos and individual children's health.

Put this all together and the benefits of lead cleanup could be in the
neighborhood of $200 billion per year. In other words, an annual
investment of $20 billion for 20 years could produce returns of 10-to-1 every single year for decades to come. Those are returns that Wall Street hedge funds can only dream of.

Oddly, cleantech markets and social capital markets are barely aware of each other, despite obvious areas of complementary expertise. So I traipsed to San Jose to the Clean Tech Open Global Forum to interact with the very high quality CleanTech entrepreneurs, and those entities that fund them.

I have a project in mind to facilitate the bridging of these investment ecosystems that I hope will unlock further capital, but for now, let me simply report on some excellent startups I spoke with.

Impact investors would be interested in what I think of as Alchemy 2.0, and Regenerative Products

Waste (post-consumer, especially) to energy

Waste (post-consumer or industrial) to disaster recovery goods

Energy Grid-busters

Off-grid irrigation and energy solutions

Those companies in the gray area described below that add Social Entrepeneurial connection into the communities they serve, primarily via directly creating Green Jobs and providing education.

In this article, the assertion is that there aren't enough jobs, because jobs have been taken away by technology or by outsourcing work.

But... Isn't there plenty of work to do to clean up the environment (and possibly help people) around where you live or work? Who's paying people to do that? No one? Why not?

What's broken is structural. What's going on these days is an inability to identify what work needs to be done. This is because our measurement system for productivity making tchotchkies is out of alignment with what makes life worthwhile: lessening suffering and increasing creative expression, and those goods and services that enable these ends. But we don't measure suffering or wellbeing - we only measure profits. We assume that magically, entrepreneurs will design the right products - the products that the market demands.

But how are those market needs identified? How are investment decisions made? When we align those two questions with actual "first world" needs, we will see the resurgence of jobs.

Until then, due to our economic lack of imagination, we will remain reliant on creating goods for people who don't need them, just want them. "Want" describes a soft market. If we want firmer ground to stand on, we must do the difficult work of identifying what is needed.

1. Hydrovolts - I first saw them when they were a finalist in 2009. They have a non-solar off-grid energy solution. This is a microturbine that drops into a water canal. It's designed for extreme environments. These are smart experts who are solving the system of remote power generation issues and there is current demand for their product. They're looking to begin building their next round after the first of the year.

2. Growing Energy Labs, Inc. - They have an off- and on-grid solution for microenergy storage. They have a specific progression of ramp up for which they are seeking funding now. The executive team is polished, experienced, and highly educated.

3. Ventana - Moving further away from power generation, this is a fascinating technology within the world of waste->energy. In this case, mixed, unsorted plastics ("virgin waste") are converted to fuel. There is an 80-90% conversion rate. I can explain a bit more of the science in person, but the long story short is it's reasonable - basically they take very long hydrocarbon chains and "cut them up" into the length of fuels. The risks here are in scale-up and manufacturing. However the benefit is that it makes it cheap and less risky to mine landfills. I know this is not something particularly of interest, but it might be a good one to pass along. Amit Tandon is here through the weekend, resides near Delhi and I suspect is US-educated (very fluent verbally and culturally). Khosla Ventures was interested in him; I don't know if it would make a difference if they led the round. +91 1733 220087amit.tandon@ventanacleantech.com

4. Kiverdi - a bit further away is Kiverdi, which uses microorganisms to tune refining reactions, taking waste syngas and creating useable chemicals out of that. I mention it because it was very interesting. The CEO is Lisa Dyson. She has a PhD in physics from MIT, is very personable and professional, is a woman, and is black, so definitely worth keeping on the radar in general. lisa.dyson@iverdi.com510 394 4443. Based in SF.

Out of public companies only, in everything related to advanced materials (nanotech, solar, etc.), my gig was to pick something related to alternative energy. They needed to buy and hold for 3 years. After a few months of analysis, I picked AMSC, which produces superconductive wire and products that incorporate it. They were not profitable yet. Very few analysts covered them, possibly because understanding superconductivity does require some fairly specific knowledge. The ROI was around 190%. This was from 2006-2009.

Hypothesis: It's GOOD that the US middle class (and lower) is becoming desperate, because in order to change behaviors drastically, it's going to require masses of people doing whatever it takes for them to survive, and the uberwealthy will in turn need to set up and financially support the rules so that "doing whatever it takes" actually is survivable.

(My own objection: most of the uberwealthy are too out of touch to understand what needs to be done, how quickly, and how extensively.)

This is simply a quick overview of topics I intend to work up further.

(1) The difference between microfinance and economic development is that microfinance assumes the intangible assets are already there (or easily built), specifically the intangible assets related to health, relationships, and skills. Economic development focuses on building those intangible assets first, without concern about whether a lack of access to capital will mean they stagnate or decay once they've been built.

(2) The way to enable future economic growth is to build intangible assets. "Supply side" economic thought glossed over the fact that when you invest in a business, relationships and knowledge are formed along with an actual product that may or may not make it to market and then be competitively successful. However, stimulus money does the same thing; in particular it builds relationships and guards physical and mental well-being. Just as community development + microfinance need to work together in emergent markets, encouraging the flow of capital and ensuring the maintenance and growth of intangible assets is crucial in the revitalization of mature markets, whether they're distressed or booming.

Most intangible assets are built in families and communities (and intangible liabilities are unfortunately built there too, in the forms of behaviors that limit the development of trust, health, emotional wellbeing, etc.) Specific metrics can be built into community monitoring processes in order to support community and build a framework for future economic value.

(3) Specifically, the way that the innovative environment in Silicon Valley can be "replicated" is by mapping the intangible assets which are used to create the tangible ones, and then thinking about how to build those intangible assets within a new environment. It's a "localization process," requiring replicating and refining that process in other contexts. Based on past research at Ricoh Innovation Labs, I have a system for visually depicting such a map and its change over time.

(4) So, once we've gotten to a point where we can develop intangible assets in the emergent and distressed markets, and we understand how to innovate and to replicate the development of innovative environments, then we can map how to replicate specific, successful programs within that environment, using the same methodology.

(5) Finally even in existing firms who are relatively successful in navigating the fast-changing waters, it's likely they have a Corporate Social Responsibility program. There are many reasons to have such a program, including building internal morale. However, by measuring impact and tying this into community metrics, a significant amount of knowledge can be built, turning CSR programs into strategic assets for firms.

(1) Return on Investment. In order to do this properly, it's crucial to link to all possible outcomes of an investment to gauge the impact the investor cares about, and hopefully to understand the context well enough to parse out any environmental influences. For financial investments, we note financial return. For community investments or development-oriented investments, there are specific outcomes to note... and it gets complicated quickly.

Take a simple business situation where the question is what is more important: immediate cash flow or trusting interpersonal relationships? Assuming we identify that we need both, how much cash do you put into social capital building and how do you measure its financial value? This is "difficult" because it's impossible, without knowing a lot of related data.

(2) Risk Management. I suggest you examine using risk management as the primary way to value intangible assets. It may not be obvious what strong social relationships bring in financially, but it's certainly obvious what risks need to be mitigated. (And in thinking this through, a heuristic emerges that facilitates decisionmaking that is actually in alignment with value creation... but that's another post.)

Risk Management can be well understood by traditional investors and financially conservative people: you figure out the amount of financial risk, and then the probability -- often scenario based -- of that risk occuring. So if a risk is a $10 billion threat, and it has 0.001% chance of happening, mitigating that risk has a value of up to $100,000.

What's the risk of not having customers in the future? Of your marketing program not working? What's the financial risk of a severe flu season vs a minimized one?

The more complex questions, but the one that can be used to build alliances: what's the risk of an uneducated group of parents to the local hospital, and the risk of a population that doesn't manage their own health well for the schools?

After having conversations about what is maturing in this space and what is emergent, it seems that the big "buzz" is around: what about US? And by "us" I mean the United States.

Specifically, why are we focused on extreme environments internationally when there are extreme environments in the United States?

This question was first brought up on Social Edge forum in about May 2009. (Can't find the link; will update when I can.) But it has persisted and grown, and every conference makes it more obvious that there is a dearth of socially-oriented businesses incubated in a more survival-oriented culture by those very people who have few resources... that are represented.

Is it real? If so, is it a matter of patronizing attitudes that we're unwilling to face? Is it because of an international infrastructure that makes it easier to get funding for work in Uganda than East Oakland? Something else?

Or is it an artifact of disconnected communities, where the elite-educated go one way, and the grassroots grown innovators go another?

There's no denying there are entrenched problems in the extreme environments within the United States, but there's also no denying that there is massive innovation emerging here, also. However, those stories are not making the news in the way international work is.

Fundamentally, that article took issue with the mission of the social enterprise. I believe that "social enterprise" is a compromise term anyway, and what's important is linking what we do for a living with what we need to do as a species to survive. We're getting there; the economic models are developing, the finance is changing, but it's a big project.

You know, it's miserable to feel like you're working against your own, your family's and your community's best interest. And that should tell us something.

I'm adding a few references to my assertions.

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Not to oversimplify, but it's pretty direct:

- in order to build products and services, we need developed intangible assets (knowledge, relationships, processes, physical and emotional health, creativity) [Note: see Baruch Lev's seminal work, and many others since then.] - a large amount of intangible asset creation and development happens in the community, transcending the boundaries of the firm, or even being initiated in the community at large by people who are unaffiliated with any firms. [see Anne Saxenian's study comparing HP/Silicon Valley with DEC/Boston area.] - therefore, when a company takes on its corporate social responsibility, it links back into the community and is able to develop pathways to assist faster development of intangible assets, gain knowledge of where they are and what affects them, and bring them into product/service-relevant activities when it's appropriate.

That's just strategic behavior. It can be done poorly -- there's such a thing as a poor strategy, or an inefficient one -- but that's how "edge" is built, that's how companies compete with each other.

In his column in the NYTimes, Paul Krugman equates 2010 with 1938, in terms of government stimulus, and in particular comments that we won't have the "benefit" of 1940 to pull us out. He also goes on and on about deficit spending.

But it's not ANY spending! That's as absurd as believing that throwing money at any entrepreneur with any product idea is going to create a viable new industry.

It's not "deficit spending" at all, in fact - it's "debt-based investment" in the future, specifically investment in those building blocks we know will lead to economic growth.

During a war, we "deficit spend" by investing in wartime technology research, which links together scientists and engineers in working relationships, and creates new knowledge, some of which can be applied during peaceful times; plus there's the added market post-war to replace all the stuff that was destroyed.*

We DON'T need to "deficit spend," and we don't need to have work programs just to get people to use their existing skills for the time being -- we're just postponing the inevitable. (Dear my government: please stop paying people to repave existing perfectly good roads! It's a poor investment and I can't get to work!)

We DO need to determine which scenarios to look at going forward, we need to determine what markets will emerge, we need to train people for those markets and encourage forming relationships and facilitating social structures that help people transition from one situation to the next.

Krugman says,

But it’s both instructive and discouraging to look at the state of America circa 1938 — instructive because the nature of the recovery that followed refutes the arguments dominating today’s public debate, discouraging because it’s hard to see anything like the miracle of the 1940s happening again.

The "miracle"?! Actually I think the inevitability of war after prolonged global depression and partial collapse of the middle class isn't so far-fetched. We may yet experience the "miracle" of 1940 if we don't commit to making ourselves relevant to the future needs of our households and communities, either directly or through the industry of our businesses.

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* War looks like a good return on investment, but that's only because we don't monitor the actual costs, we just lump them under "tragic!" and press on. Those costs begin with the people, who are never accounted for financially so we don't notice deaths, emotional trauma or resentment, which can persist for say, 60 years (so far), spawning new wars, economic hardship and suffering. We don't count the destruction of historic record, art, or existing relationships and knowledge. We do count veterans benefit payments; but we don't count the lost productivity of young men and women who have been injured or made ill by the war, nor the cost to their families.

The NY Times recently posted, "Oil Hits Home, Spreading Arc of Frustration." Say what you will, but I still believe the hubris involved isn't BP's, it's societal: the idea that whatever happens, "we'll cross that bridge when we get there."

Building industry to cater to peoples' desires (e.g. cheap oil) is likely to leave us all dying on the edge of a cliff while we try out our 45th bridge design. This isn't about bad companies or bad regulators, it's about a faulty social values infrastructure that believes that if you have money, then you must be doing something right.

Note, that doesn't mean that poor people are virtuous, or that having money means you're doing something wrong. It means that money doesn't measure virtue, it measures the ability to provide a good or service that others are willing to pay more than it costs to make.

I had a great time livetweeting the Future of Money and Technology conference on Monday.

Now I've had some time to reflect, and my overall impression is, as it often is, peripheral:

In a convenening of leading edge experts, there needs to be plenty of unconference time. Not "networking," which is also fun but not as crucial to the conference itself; but some mechanism of meeting people in situ and gauging their relevance. Unconference. Location-based game relevant to the topic. Table topics. Q&A of yet more entrepreneurs is a public service and it does allow people to ask questions, but it's just not as fruitful as full-on unconference dynamics.

After going through and counting the number of women on panels as well as black-looking people, Asian-looking people, and the Hispanically surnamed, diversity is still an issue. Representation wasn't horrible (it wasn't good but my expectations are very low); the issue is socioeconomic diversity - particularly in a forum about money. Convening the opinions of financially supported "global" college kids and their sophisticated parents do not make a diverse group regardless of skin color (and increasingly, country of origin). Avoiding groupthink of the innovators is crucial to the adoption of new ideas into new markets.

The second crucial issue of the conference is the difference between new people who have been reading for a year and have been forming opinions that are sometimes interesting but just as often a little bit sophomoric, vs. people who have been in the space for a decade. As always, the latter group pushes against the former's well-meaning obliviousness. And the former may become self-aware to the point they clam up, which is a bad thing because they bring new ideas and energy. It's up to the conference organizers to pull out the true experts, and when this is delegated to the panelists, they sometimes have extra-conference agendas to advance, relationship-wise. Another point for unconferences.

And last, Jim Benson and others have been urging me to find the time to write up the way I look at valuing ROI for intangible assets. The interest it garnered when I was teaching a class was surprising as well. I know it will be helpful. I need to find some reason to prioritize that as #1.

Other than that? The topical highlights

Plenty of focus on community banks that are almost coops

Tying virtual currency to actual currency

Unbelievable amount of focus on mobile as exchange platform - and some things are actually nifty

Microfinance has become a cult (well, ok, maybe not quite - but it's getting there!)

Interesting comments about repurposing bank physical infrastructure

Effort to create exchanges for credit card debt terms (etc.).

Oh yeah. One last thing. #futureofmoney has too many characters for a conference hashtag. If you organize conferences, remember to keep the limit is 5. Throw numbers in and special characters and keep it to 3 or less. How about #F$ ? That would've been perfect!

If you're interested in this topic (and why are you reading my blog if you're not?) go buy it! (Or ask your library to do so, and
then borrow it). It’s got a lot of anecdotes, it explains the methodology HIP
uses, it points you towards data sources… a very useful book! It’s a great gift
for people who wonder how to invest money or time, whether that’s a new
graduate, a career-changer, or an investor or philanthropist.

The HIP methodology makes it straightforward to
understand how to look at intangible assets within an organization and
relate that to financial performance. It will move you past the fundamental assumption of the Efficient Market, and as you can imagine, this jazzes me silly! (How? Why? Well, now it's time for...)

From the call alone -- I haven't read his book yet though I'm eager to -- the "long story short" is that the right hemisphere takes in
far more information and doesn’t categorize it, while the left brain requires
structure and simplicity. The author points out that the perception of our world is, specifically, subjective perception, and he believes that we're in a period of history where the left brain is dominating that perception at the expense of the right.

Because my mother was an artist and my father was a
Scientist (well, a psychoanalyst, but he philosophized about science) I have
been juggling exactly this issue for a long time.

In the field of social entrepreneurialism, we’re at the same
point, where some early adopters love the right-brained, fluid, holistic approach, but where the greater mass of the population would prefer something consistent and codified. ("Should" and "shouldn't" don't pertain; it's simply a matter of dominant perceptions.) Burnt out by “Top 5 Ways to be Sustainable” lists, they know
they need more substantive guidance, but to really understand the field still
requires a large commitment of time and energy, and whether you happen to be
a young grad trying to find a first job or an exhausted, middle-aged doctor, you just don’t really have time for
that.

So if the leading edge of the curve is deeply enmeshed in
right-brain stories, social enclaves, ad hoc TEDxVolcano flash forums, etc., what are
those people who approach managing their money with a “just tell me what to
do!” approach, to do?

This is where I believe the HIP Investor book, itself, shines. The
HIP methodology is used and useful for everything from public portfolio to
angel investment evaluation and management. But the book is a brilliant way to
communicate with those 99% of the people in this world who just want a practical way to integrate their feelings about their personal values with their practical financial challenges. The vast majority of people need a set of
practices to follow that will maximize their financial return and ensure their world is a
joyfully liveable place.

What has struck me recently are the number of tremendous people thrown down hard in this economy. With no revenue, with layoffs everywhere, and most people having plenty of time to raise their skill sets, what's an enterprising innovator to do? Why, create social good of course!

Today I'm going to address what do you do if you're one of the people who still do have financial assets and an intact career, and feel beleaguered by the masses of excellent people and fascinating projects asking you if you'd like to be their Sponsor.

The simplest thing is to turn all of them down, but if you wanted to do that you probably wouldn't be reading this post. You can make allocation based on the strength of your relationships - and truly there is nothing wrong with that, though you may feel that you're not investing as wisely as you could be, and just that thought alone might make those relationships weaker. So if you do want to help rebuild the economy and solve emergent social problems, how do you evaluate amongst the choices? The same way as you always make decisions: know your own mind, first.

(1) Decide what you, personally, think are the challenges that affect your environment and the world at large. Climate change or pollution? Water access? Political instability? The Skoll Foundation is establishing the Urgent Threats Fund to address climate change, water scarcity, pandemics, nuclear proliferation and Middle East conflict, as an example of top-level threats to the world. There are others. And there are specific issues that need to be addressed that we know have immediate leverage, not to mention the business of business, simply identifying a clear market need and servicing it.

(2) To the extent you would rather not put your own revenue stream at risk, but you do see large-scale risks as problematic, you may want to contribute to those solutions. To the extent you simply want to see economic recovery, you can invest in those projects that will bolster "the size of the pie."

(3) Pick your area of interest, then decide what the antecedents are -- those things that must happen in order to make progress in whatever issue area you have interest. Don't have any idea? Then the first step might be to research the antecedents, which can be as simple as a literature survey.

(4) Then you can look at your deal flow with a stable foundation from which to make decision: do the deals presented to you manage one or more of the antecedents? What is the competitive landscape of that antecedent, and how well is the assembled team able to gather the resources -- financial, knowledge, human, technological -- to address the issue?

(5) Specifically, you can look at the growth of intangible assets as antecedents to an eventually stable economy, or you can look at how those assets can manage risks to other assets.